The Market Today
Powell to the Hill as Global Reflation Trade Dominates Market Trends
by Craig Dismuke, Dudley Carter
CORONAVIRUS UPDATE (VS Coronavirus Chartbook – PDF)
U.K. Prime Minister Speaks Hopes of All: Verbalizing the hopes of an entire planet, U.K. Prime Minister Johnson said Monday, “The end [of the COVID-19 pandemic] really is in sight and a wretched year will give way to a spring and a summer that will be very different and incomparably better.” His remarks followed the release of a detailed plan to gradually pare back restrictions in England. Among the measures, schools will open in early March followed by non-essential businesses and outdoor venues and hospitality on April 12. The plan culminates with the removal of restrictions on all other businesses from June 21.
Hopes Growing Vaccines Will Break COVID-19’s Grip on Society: U.S. deaths attributed to COVID-19 crossed a grave milestone Monday, rising above 500,000. However, optimism is growing that vaccines could greatly reduce the lethality of new infections. A U.K. study became the latest to signal a single shot of Pfizer’s vaccine greatly improved outcomes, even without a second dose. The study said just one dose cut the risk of hospitalization and death by 75% and reduced the chance of contracting SARS-CoV-2 by 70%, a result that rose to 85% after a second shot. A growing body of research shows the benefits of even one shot and signals it may also break transmission, a question left unanswered in initial trials.
Vaccine Availability Could Improve in Weeks Ahead: The White House expects the vaccine logjam caused by winter storms clear by the middle of the week. More important to the bigger picture, major vaccine producers sounded optimistic in prepared remarks released ahead of appearances before Congress later today. Pfizer indicated it could more than double U.S. shipments by the middle of next month. Moderna is discussing the use of larger vials with the FDA, a step that could increase doses by 50%. More broadly, the company expects to double U.S. deliveries by April. Johnson & Johnson could ship 20 million doses of its one-shot vaccine by the end of next month, assuming FDA approval is received soon.
The Push for Stimulus: The House Budget Committee pieced together and passed the various committees’ components of President Biden’s $1.9 trillion stimulus proposal on Monday. The full House could vote on the bill later this week. In a webinar Monday, Treasury Secretary Yellen, who has said that amount of stimulus is still needed despite some recent improvement in the pandemic and economic data, hinted at various ways the administration may look to offset the total cost. The President favors raising the corporate tax rate from 21% to 28%, she said, before noting that a higher capital-gains tax may be “worth considering.”
24 HOURS OF MARKET ACTIVITY
Tech Stocks Continue to Weaken as Upward Pressure on Sovereign Yields Persists, Despite Dovish Central Bankers: U.K. Prime Minister Johnson captured the market’s recent sentiment in a comment Monday that the end of the COVID-19 pandemic “is in sight.” An improving pandemic has combined with some better economic data and a persistent whatever-it-takes mindset from government leaders and central bankers to send longer sovereign yields on a steep climb in recent weeks. Ahead of Monday’s U.S. trading session, Japan’s 10-year yield rose to its highest level since November 2018 and major European countries saw 10-year borrowing costs hit their highest levels since June. While European yields were dragged back down early in the U.S. session on a remark from the ECB’s president that the central bank was monitoring the rise in long-term yields, the gravitational force had little effect on Treasurys. After a brief intraday dip, the 10-year Treasury yield settled up 2.9 bps at 1.37%, a new high since February. The jump in longer yields in recent weeks has spooked equity investors, weighing on the major indices again on Monday. The Dow managed to recover to post a marginal 0.1% gain, but the S&P 500 dropped 0.8%, registering a fifth consecutive decline for the first time since February 2020, while the Nasdaq slumped 2.5%, its worst day since January 27.
Those Wall Street dynamics have so far dictated trends in global trading Tuesday, with tech weakness leading to declines in most major equity indices. The persistent rise for Treasury yields yesterday has helped pull European sovereign yields back up. Germany’s 10-year yield was 3.5 bps higher to -0.31% at 7 a.m. CT, fully erasing Monday’s decline and back near the highs since June. Treasury yields, however, leveled off ahead of Fed Chair Powell’s testimony, with the 10-year yield nearly unchanged, just below 1.37% at 7:20 a.m. CT. Equities appear set to continue Monday’s split as Dow futures rose less than 0.1% while Nasdaq futures fell another 1.5%.
Global central bankers signaled a varying degree of concern on Monday about the recent rise in longer sovereign borrowing costs:
Richmond Fed President Barkin said “profound” disinflationary forces remain in place and, despite the possibility that pent-up demand could stoke some temporary price pressures, noted he hasn’t seen evidence of a fundamental change in broad inflation expectations. The rise in long-term bond yields is not “a problematic situation,” he said, noting they instead reflect a sense of economic optimism. He also reminded his audience that yields remain low by historical standards.
Dallas Fed President Kaplan said rising bond yields in a sustained recovery would be a positive sign, after earlier noting that he now sees upside risks to his 5% 2021 GDP growth forecast. Between his two comments, the Dallas Fed updated its manufacturing index for February, reporting an unexpected gain from 7.0 to 17.2 (expected 5.0), its highest level since October’s pandemic high of 21.2. Inflation indicators in the survey pushed higher, but so too did current orders and production. While employment softened and several key indicators for six months from now moderated, general expectations for future business activity rose to the highest level since October 2018.
However, the comments that caught the market’s attention were made by ECB President Christine Lagarde. Disrupting an overnight rise in longer sovereign yields across Europe, the head of the ECB said, “Sovereign yields are particularly important” because “Banks use those yields as a reference when setting the price of their loans to households and firms. Accordingly, the ECB is closely monitoring the evolution of longer-term nominal bond yields.”
Powell’s Testimony Comes As Inflation Indicators Heat Up but Monetary Communication Remains Unfazed: Fed Chair Powell’s testimony before the Senate Banking Committee today has become even more important to investors given the ongoing rise in longer-maturity interest rates, the associated increased in inflation expectations, and the heretofore lack of concern from Fed officials. With the economy appearing to gain traction in early 2021, a $900 billion stimulus package just now beginning to flow through the data, prospects of another $1.9 trillion stimulus plan, commodity prices already on the rise, 5-year TIPS-implied inflation expectations at their highest level in 13 years, and the 10-year Treasury yield up 44 bps in 2021 alone; the inflation dashboard certainly has a few yellow flashing lights. At some point, Fed communications are likely to reflect a concern about the rise in interest rates and the damage it could do to the economic recovery.
Home Prices and Consumer Confidence: Also today, FHFA and S&P CoreLogic will release their December home price indices (8:00 a.m. CT), both of which are expected to show the housing market continues its rise. At 9:00 a.m., the Conference Board’s February report on consumer confidence is expected to inch higher.